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SNB Predicted to Reaffirm Franc Pledge

Swiss central bank President Thomas Jordan. Photographer: Valentin Flauraud/Bloomberg
Swiss central bank President Thomas Jordan. Photographer: Valentin Flauraud/Bloomberg

Sept. 12 (Bloomberg) -- Swiss central bank President Thomas Jordan will tomorrow reaffirm his commitment to defend a franc ceiling that has survived a year of speculative attacks, scandal and political criticism.

The Swiss National Bank in Zurich will keep the franc ceiling at 1.20 versus the euro when policy makers meet for their quarterly assessment, according to all 10 economists in a Bloomberg News survey. It will also leave the benchmark interest rate at zero, a separate survey shows.

The SNB’s franc policy survived one breach of the ceiling and the resignation of former central bank President Philipp Hildebrand as Switzerland found itself in the eye of the storm of the debt crisis afflicting the currency area surrounding it. Its success came at the cost of the bank amassing record currency holdings, while it still didn’t prevent consumer prices posting annual declines for almost a year.

“The SNB deserve a cautious pat on the back but not much more,” said Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva. “They are now sitting on a mountain of euros and while Europe has taken a big step forward, the problems have not evaporated. It’s like they cornered the dynamite market -- it only needs one match.”

The franc traded at 1.2088 versus the euro at 1:23 p.m. in Zurich, up 0.2 percent on the day. It was at 93.59 centimes versus the dollar.

Hildebrand Resignation

The SNB will announce its decisions and publish new economic projections at 9:30 a.m. tomorrow. The three board members -- Jordan, Jean-Pierre Danthine and Fritz Zurbruegg -- won’t hold a press conference.

The SNB has held up its defense in the face of increasing investor concern about a euro breakup after Spain and Cyprus joined Greece, Ireland and Portugal in asking for external aid, as well as the surprise resignation of Hildebrand in January over currency trades by his wife. Jordan was appointed president three months later.

The central bank introduced the ceiling on Sept. 6, 2011, after the franc’s surge to near parity with the euro raised deflation threats and eroded export competitiveness. Protecting it has boosted the SNB’s currency reserves to 418 billion francs ($443 billion), about 73 percent of Swiss gross domestic product. Euros accounted for 60 percent of holdings at the end of the second quarter, up from 51 percent three months earlier.

“There’s no doubt that it’s been a tough year for the SNB, especially during the past four to five months,” said Simon Smith, chief economist at FXPro Group Ltd. in London. The ceiling “may have held fast, but it’s not been without cost.”

Currency Bets

The franc weakened 0.8 percent last week, touching an almost eight-month low of 1.2155 per euro, as the European Central Bank’s bond-buying plan boosted the single currency. The euro has appreciated about 5 percent against the dollar since Aug. 2, when ECB President Mario Draghi first said the central bank may intervene in bond markets to contain the debt turmoil.

With investors regaining some confidence in the euro area, traders are cutting bets that the franc cap will fail, so-called risk reversals show. Three-month options contracts granting the right to buy the franc narrowed to a 0.32 percentage-point premium over contracts allowing for sales on Sept. 10, the lowest since April 5, the day the cap was breached for the only time. That compares with as much as 4.53 percentage points on May 24.

Ceiling Breach

Morgan Stanley last month revised its year-end forecast for the currency to 1.20 per euro from 1.10, leaving JPMorgan Chase & Co., Maybank and Hamilton Court FX LLP as the only banks predicting a breach of the cap in 2012, according to data compiled by Bloomberg.

Jim O’Neill, chairman of Goldman Sachs Asset Management, told Bloomberg Television on Sept. 6 the SNB may have won some leeway to raise its ceiling following the ECB announcement.

That would be “a way of adding a new sense of belief about it,” O’Neill said. “Otherwise, they’ll have to continue to accumulate a lot of reserves.”

With the SNB amassing unprecedented euro holdings, Christoph Blocher, vice president of the Swiss People’s Party, said in June that policy makers should keep in mind that the ceiling won’t be enforceable in the long run. Oswald Gruebel, former chief executive officer of UBS AG and Credit Suisse Group AG, has also signaled doubt, saying that it’s only a matter of time until the SNB will be forced to give it up.

‘Free Lunch’

For his part, Jordan has signaled the ceiling is here to stay, saying on Sept. 3 that while there’s “never a free lunch,” the measure is the “best policy” for now. Economy Minister Johann Schneider-Ammann said in a Bloomberg News interview the same day that the measure remains of “decisive importance.”

Lobby groups and economists agree. The Economiesuisse business group said on Sept. 6 that while the franc remains “clearly overvalued,” the ceiling came at the right time. The KOF Swiss Economic Institute last week called the measure “an important step” in stabilizing the economy.

Still, the SNB may be forced to lower its 2012 growth forecast from about 1.5 percent after the economy shrank 0.1 percent in the second quarter. The government, which will publish new projections on Sept. 18, may also cut its 1.4 percent estimate for 2012, said Bruno Parnisari, an economist at the State Secretariat for Economic Affairs.

At the same time, the ceiling hasn’t prevented negative inflation rates. Consumer prices dropped an annual 0.5 percent in August, an 11th straight decline. The SNB in June forecast that prices will fall 0.5 percent this year before increasing 0.3 percent in 2014.

Alessandro Bee, an economist at Bank Sarasin in Zurich, said the second half will remain “difficult” for the Swiss economy, with further decreases in consumer prices.

“That’s why we expect the SNB to keep the ceiling on hold into 2013,” he said. “There’s a bit of a temporary respite for the SNB following the ECB’s announcement but I could well imagine pressure on the franc increasing again over the coming months. Jordan’s job won’t become any easier.”

To contact the reporters on this story: Simone Meier in Zurich at; David Goodman in London at

To contact the editor responsible for this story: Craig Stirling at

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